Construction accounts for a major part of the South African economy. Unlike other emerging markets, the South African construction and infrastructure industry has struggled post 2010 FIFA World Cup with depressed growth, only showing a slight recovery in recent months. The fact that the construction industry made headlines in 2013 for all the wrong reasons, most notably the infamous Competition Commission enquiry, also didn’t help matters much.
“In an industry that works on a very small profit margin to turnover, there is not much slack for things to go wrong and when an indeterminate risk crops up, it is often far worse than an assessed risk,” says George Davis of Insurance Brokerage and Risk Advisors, Aon South Africa.
Insurance is generally considered important and indeed when things go wrong, insurance may be the only viable means of ensuring that a project gets back on track. “In reality, insurance rarely receives the attention it deserves in the context of importance. The insurance aspect of a construction project is well documented during the risk management process. It has more influence as a means to guide risk during the design and feasibility of a project, where after its impact considerably reduces upon commencement of construction operations,” says George.
The Project owner, construction companies, consultants and financial institutions, vendors, suppliers and even the service providers, face their own risks in the conduct of their business. “The implementation of an effective risk management programme will protect assets, improve stability and long term profitability, safeguard business reputations, reduce insurance claims in addition to insurance premiums and will ultimately guard future opportunities,” explains George.
At times the magnitude of a risk is indeterminate, but we can determine:
- The proportion of real versus perceived risks
- The monetary quantification of risks
- The real import and the impact of a type of risk
Contractual risk management provides a clear structured approach in addressing responsibilities to insure construction projects. “Risk transfer using contractual liability is one of the most important risk management tools available to risk managers and yet can be one of the most complicated and complex to understand,” says George. “The concern in particular rests within the insurance provisions.”
“Ideally, the parties, in their contract, will assign the risks and liabilities to the party best suited to manage and minimise the risks. It is crucial that the risks and responsibilities associated with specific projects are clearly allocated within the contract. It ultimately serves as a framework of the law between the parties involved and will establish which party has assumed or negated a particular risk in connection with the project,” explains George.
Type of Risks
Broadly speaking, construction projects face the following type of risks:
- Business Risks – Construction companies face risks to transformation, health, safety and environmental sustainability, followed by growth and expansion, in addition to compliance with laws and regulations.
- Financial Risks – A delay in the completion of a project often leads to increased costs and is more often the simple consequence of underestimating what it will take to finish a project.
- Technology Risk – New materials and building techniques are emerging to help meet client demands of faster, cheaper and greener construction projects, these same innovations can potentially lead to unintended consequences.
- Project Risk – The construction industry inherently has a higher risk of occupational injuries and diseases due to a potentially hazardous and accident-prone working environment.
- Political Risk – Labour unrest have caused many headaches for construction companies in South Africa and SASRIA in particular does not cover loss of income without physical loss or damage to the construction project. Insurers’ appetite for risks such as project standstill caused from riot, strike and lock out without physical damage to the works from a global perspective have diminished over the years due to claims increasing year on year, rendering the risk almost un-insurable.
“Construction work itself is exposed to significantly higher risk of damage caused by natural perils such as storms, floods and landslip in addition to facing man-made perils represented by the construction operations themselves. The risks of fire, impact, instability and collapse are also intrinsic to the process,” says George.
Contracting into Africa has huge opportunities for growth, provided that the laws and regulations are followed for each country. “History often repeats itself in times of financial recession when some contractors venture into the unknown to make a quick buck, but often to their own peril. If such ventures are carefully planned and strategy aligns with local knowledge and participation, positive results can be realised,” George says.
The same applies to insurance. “Placing insurance in Africa must be followed with strict discipline in partnership with local markets and compliance with laws and regulations. If not, local penalties and withholding taxes could cost the contractor dearly. It is advisable that a contractor engage the services of an insurance advisor who has the necessary experience and knowledge to guide contractors through any potential pitfalls,” George urges.
Mitigation of risks is the all en-compassing requirement. “For this reason, insurance needs to be an integrated part of the entire risk management process in construction projects in a practical, proactive and systematic way. Insurance provides a whole range of insurance products to negate the risks and it is available to all parties that comply with the terms and conditions of such insurance,” concludes George.